High hopes for Microsoft, but stock still adrift

By IBT Staff Reporter On 07/22/10 AT 2:56 PM

Signs point to strong results for Microsoft Corp as companies get around to buying computers after a two-year drought, but its stock may find it tough to gain altitude amid worries about where growth will come from in coming years.

Intel Corp smashed Wall Street's expectations last week, pointing to resurgent demand from corporations for computers and servers. But IBM disappointed on Tuesday with weak technology services signings, in a surprise hint of weakness in IT spending.

Investors appear to have anticipated good news from Microsoft -- whose stock has outperformed in July -- but are now demanding to see more from a company struggling to make its mark in the pivotal and fast-growth areas of smartphones, tablet computers and search advertising.

Microsoft will announce fiscal fourth-quarter results on Thursday.

The company is gearing up to launch new phone software to catch Apple Inc and strives to raise consumers' pulses with a range of Windows-powered tablet devices and its untested Kinect motion gaming platform.

Everyone knows that Microsoft is going to have a pretty big quarter, but there's really not a lot to get excited about beyond that, said Toan Tran, an analyst at Morningstar. We know PCs are doing well so Windows is going to do well. Beyond Windows 7, what does Microsoft have going?

Microsoft's shares are up 10.4 percent this month, surpassing a 7.5 percent rise in the Standard & Poor's 500 and an 8.3 percent rise in the Nasdaq. But they are sitting around the $25 mark -- where they were a year ago -- and well below the heights achieved during the tech-stock boom a decade ago.

Apple, which has seen its stock soar over the past several years with a string of highly popular consumer electronics products, made waves in May when it passed Microsoft as the world's most valuable technology company. Analysts say it may now surpass Microsoft in revenue as well.

StarMine data shows the stock has tepid upside momentum, assigning it a long-term momentum score of 40 out of 100.

TECH SPENDING RETURNS

Data from Thomson Reuters StarMine show that analysts' estimates for Microsoft's earnings have been creeping up as more optimistic signals emerge over the past three months.

Analysts expect earnings of 46 cents per share, excluding items, on sales of $15.3 billion in the fiscal fourth quarter, according to Thomson Reuters I/B/E/S. That is well above 36 cents per share on revenue of $13.1 billion a year ago.

SmartEstimates -- which puts more weight on the timeliest estimates from the most accurate analysts -- suggest Microsoft will deliver profit about 1.6 percent above average estimates.

When companies buy PCs, they often install new -- and more expensive -- versions of Microsoft software, which has a direct effect on its margins. Global PC sales surged 22.4 percent in the second quarter, industry tracker IDC said this week, helped by strong demand from businesses.

Microsoft said this week it has already sold more than 150 million copies of its Windows 7 operating system since launching it October. Chief Executive Officer Steve Ballmer said he expected sales of 350 million PCs running Windows this year, confirming its status as the fastest-selling operating system ever.

Corporate PCs are starting to pick up. Intel validated that, said Kim Caughey, senior analyst at Fort Pitt Capital Group. A lot of companies are thinking, these old PCs are sucking the life out of my IT department, lets get a new generation of these things in here'.

Another potential growth driver is Microsoft's Xbox 360 gaming console, which competes with Nintendo's leading Wii and Sony's Playstation. Analysts are cautiously upbeat on Kinect, which is selling in time for the holiday season. Though at $150 deemed costly by some, others say it could take the gesture-gaming concept popularized by the Wii to a new, controller-free level.